Is Gold Bound to Rebound?

Recently, investors have suffered an average market decline of 6.5% in the
equity portion of their investments, the largest fall since the dark days of
October 2008, with $1 trillion of paper wealth evaporating in the process.
Speaking of October 2008, it was then that gold prices tumbled 18% as turmoil
in global financial markets led to losses in global equity and commodity markets.
The precious metal rallied 23% in the next two months.

So why did precious metals take such a fall? As our correlation matrix showed,
over the past few weeks gold had decoupled from stock markets and every time
stock markets sold off, gold would rise as investors would seek it out as a
safe haven. However, the Chicago Mercantile Exchange (CME) began raising the
amount of margin it required to buy a gold future with three raises since July.
In total, margins have risen by $5, 400. (You had to put more money down to
invest.) If you recall, the same thing happened with silver when it went parabolic
in the spring. The CME raised margin requirements four times, amounting to
an 84% hike. At that time silver also sold off. Then again, historically, margin
hikes are known to be much more important for silver than they are for gold,
so it seems there must have been more to the bearish case than just margin
hikes.

Another factor influencing the drop was selling by investors to meet margin
calls on other losses, or by investors anxious to lock in some profits and
gold and silver is where the profits were to be found. This effect was particularly
strong since gold moved so high recently and so many momentum players were
aboard. It is important to remember that violent sell-offs in equity and other
asset markets can spill over into precious metals, but after an initial selling
wave, gold tends to disassociate itself and rebound.

To see if this might be the case now we will now take you to this week's technical
part. We will start with the analysis of the yellow metal (charts courtesy
by http://stockcharts.com.)

Let's take a look at the very long-term chart. Gold plunged very dramatically,
but stopped close to the $1,600 target level. This level is based on two rising
support lines. Clearly significant levels have been reached in both price and
the RSI indicator (as seen in the upper part of the chart).

The long-term RSI, which is based on weekly closing prices, moved to the 50-level
after being previously extremely overbought. Similar price actions where previously
oversold RSI declined along gold prices have been seen eight times previously
during this bull market. In seven of the eight times, gold's decline stopped
when the RSI reached the 50-level and a sizable rally soon followed. Each of
these important local bottoms has been marked with a red ellipse in our chart.
In some cases, the bottom was final but even when an additional decline was
seen a short time later, significant rallies ensued. The RSI is close to the
50 level and it appears likely that gold will rally from here.

There is no doubt that like everything else, the bull run in gold will
eventually come to an end, but we're still a long way off. We see the sharp
decline as an opportunity rather than a warning. It is a good time, for
those who wished all along that they had bought gold, to do it on dips.
Nothing that has taken place over the past weeks lessens our long-term
optimism about gold. The same fundamentals are still in place.

In the long-term chart for gold from a non-USD perspective, we also see that
a strong support line has been reached. The previous breakout above the resistance
line created by previous tops has been invalidated, but the technical damage
has already been done and it seems that a rally from here is quite probable.

Looking at gold from the perspective of the Japanese yen, we also see RSI
levels now oversold. Recently we have seen a decline that was much sharper
than in the past. Each time the upper border of the trading channel was surpassed,
index levels quickly moved to the lower border and this marked an important
bottom from the USD perspective as well. Such has been the case once again,
as the index moved below the lower border of the trend channel and quickly
reversed. It is now right at this level. Similar price action patterns have
been seen in the past and a rally generally has followed. The implications
are bullish for gold.

While we will leave the short-term details for our Subscribers,
we would like to feature one more important factor that is currently in play
- the SP Gold Stock Extreme Indicator.

The SP Gold Stock Extreme Indicator moved above the upper dashed line, which
was very close to a local bottom each time (!) since 2008 and in most cases
before this date. As we can see, not each and every bottom was indicated, but
when we have actually seen SP Gold Stock Extreme Indicator flashing a buy signal,
each time a short-term rally followed. What we have seen right now is a very
strong buy signal.

Does it mean that gold / gold stocks are guaranteed to move up from here?
Of course not - there are no sure bets in any market. However, it does mean
that it's very likely. What price action precisely can you expect given this
particular signal?

The best way to estimate the size of the move of any indicator (including
our own) is to simply take a look at the chart and see what happened previously
when analogous signals flashed.

In this case, we are looking for at least a 1-3 week rally that's visible
from the long-term perspective. Please take a look below for details (if you're
reading this essay on our website, you can click this chart to enlarge it).

Summing up, based on multiple factors, including charts and indicators,
it appears that we are close to or have already seen a major bottom in gold.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
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